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Tell us about your experience as an issuer developing a sustainability sukuk framework, and what are the areas for development?

Our Sustainable Finance Framework (SFF) was developed specifically to enable IsDB to issue Green, Social and Sustainability (GSS) sukuk and was crafted by a cross-complex team of finance and operations. This included treasury, infrastructure, energy, transport, climate change, project portfolio, among others.

The discussions mostly centred on the potential eligible project categories that can be included in the GSS sukuk asset pool. This required a balancing act between securing the strongest Second Party Opinion (SPO) from an external provider and the immediate needs of our member countries, who are still dealing with mitigation, adaptation and transition at varied levels.

Placing our member countries’ needs at the forefront was indeed important, so as not to exclude them from the potential funding that would be raised by issuing GSS sukuk.

Ultimately, we obtained a strong Medium Green Shading, which was in line with other peer multilateral development banks such as the International Finance Corporation (IFC), Kreditanstalt für Wiederaufbau KfW3 and African Development Bank (AfDB), who had similar considerations. IsDB also secured a very strong (low) ESG-risk rating of 11.5 out of 100, which demonstrated strong internal governance and mainstreaming of climate change policy and its considerations in our operations.

Another important highlight of this exercise was the reaffirmation of the strong alignment of IsDB’s operations as well as sector policies with global industry standards set out by the ICMA. As IsDB operates under Islamic finance principles and has best-in-class governance structures, the Framework exercise only reaffirmed the fact that IsDB already had climate change action and sustainability at its heart, which gave us a good head-start for our member countries.

In addition, the comprehensive data-capturing process by our operations teams was critical in ensuring that reliable and detailed project-level information was easily accessible for us to prepare annual impact reports for the use-of-proceeds of each of our GSS sukuk, which are available on our website for investors and other stakeholders. These reports are validated by external reviewers, whose validation reports are also published on our website.

With respect to areas for development, regional standards and taxonomies are very much needed in order to support a ‘just transition’, which IsDB supports for its member countries who are seeking to transition towards low-carbon energy solutions. This requires improved and customized standards that would facilitate, rather than restrict, this progress, so that no-one is left behind.

What was the basis for determining your preference between green and sustainability-linked sukuk?

Sukuk issuance, in general, requires an underlying asset pool whose collective worth is equivalent to the issuance amount. Therefore, a green sukuk issuance requires that a sufficient number amount of greenor climate-related projects are available to be securitized for the issuance. Sustainability sukuk, on the other hand, cover a much broader range and require a mix of green- and climate-related and social sector-related projects.

We undertook a comprehensive project data assessment to identify the quantum of green and social projects available, in line with the eligibility criteria set out in the ICMA Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines.

Determining whether to issue a green or a sustainability sukuk depends on the availability of eligible projects as well as the potential pipeline of similarly eligible projects. The potential pipeline is shaped by IsDB’s overall operations plan, which is informed by high-level objectives from its climate change policy, climate action plan, energy policy, health policy, etc.

What benefit did you gain from issuing the first ESG sukuk in your jurisdiction?

With its debut green sukuk issuance of €1 billion in November 2019, IsDB was able to secure the confidence of environmentally conscious investors from previously untapped markets such as Europe and Japan. Their participation was especially notable given that they invested in an IsDB sukuk issuance for the first time, demonstrating their comfort with the sukuk format when it is labelled ‘green’ or ‘sustainability’. Not only did this help in expanding our investor base, it also opened up new avenues of investor engagement, especially with those focused on ESG and SRI investments.

The proceeds of the green sukuk were fully allocated to 11 green projects across our member countries, in alignment with the Climate Change Mitigation and Climate Change Adaptation objectives. These included projects in renewable energy, clean transportation, energy efficiency, pollution prevention and control, environmentally sustainable management of natural living resources, and land use and sustainable water and wastewater management.

Detailed impact reporting of the proceeds and external validation was critical in providing additional comfort to the sukuk investors.

Dr Zamir Iqbal

Vice President (Finance) and CFO
Islamic Development Bank